PERG 13.7 The territorial application of MiFID

PERG 13.7RP

1Q67. What is the territorial application of MiFID?

If a firm is established in one Member State, and carries on all its investment business in that state, that state has responsibility for the entire financial services regulation of the firm

If, however, the firm provides investment services or activities in another Member State, or establishes a branch in another Member State, the questions arise ‘Whose rules apply?’ and ‘Which regulator has responsibility for enforcing them?’.

The general principle is that prudential regulation is the responsibility of the Home State but conduct of business regulation is the responsibility of the Host State.

A Host State may also impose requirements relating to matters that fall outside of the scope of the directive - for example, market abuse, anti-money laundering controls and the conditions for cold calling.

Q68. What is ‘prudential regulation’ and ‘conduct of business regulation’ in this context?

Prudential regulation relates primarily to the capital adequacy of a firm and its systems and controls. In general terms, this means every aspect of a firm’s activities relating to financial services except those areas where the firm is concerned with a client. So provisions, for example, relating to communicating with clients, client agreements, best execution and order handling are seen as ‘conduct of business’ requirements and are not prudential.

Q69. What does this mean for my firm?

MiFID is about the regulation of markets in financial instruments ? it is not about setting capital standards. It does, however, contain provisions about systems and controls and conduct of business. It also contains other market specific provisions which allocate the responsibilities between the home and host Member States.

If a firm establishes a branch in another Member State, the competent authority of the State where the branch is located has responsibility for the services and activities provided by the branch within that territory. As article 32(7) of MiFID provides, that authority has responsibility for ensuring compliance with the rules referred to in column 1 of the table below. The location of those rules is set out in column 3.

3

Subject matter

Location

1

Conduct of business obligations to clients

COBS generally but see Notes 1 and 2

2

Best execution

COBS 11.2 (Best execution)

3

Client order handling

COBS 11 (Dealing and managing)

4

Market integrity, transaction reporting and maintaining records

SUP 17 (Transaction reporting)

5

Making public firm quotes (transparency)

MAR 6 (Systematic internalisers)

6

Post-trade disclosure

MAR 7 (Disclosure of information on certain trades undertaken outside a regulated market or MTF)

Notes:

1. Further guidance on the territorial scope of COBS is given in COBS 1 Annex 1, Part 3 and in SUP 13A Annex 2.

2. The MiFID conduct of business rules in article 19 are implemented in:

(a) COBS 2.1 (Acting honestly, fairly and professionally)

(b) COBS 2.2 (Information disclosure before providing services)

(c) COBS 4.2 (Fair, clear and not misleading communications)

(d) COBS 4.3 (Financial promotions to be identifiable as such)

(e) COBS 8.1 (Client agreements: designated investment business)

(f) COBS 9.2 (Assessing suitability)

(g) COBS 10.2 (Assessing appropriateness: the obligations)

(h) COBS 10.3 (Warning the client)

(i) COBS 10.4 (Assessing appropriateness: when it need not be done) , and

(j) COBS 16 (Reporting information to clients).

Q70. How are the high level standards, like the Principles, affected by MiFID?

The position is summarised in the table below.

Subject matter

References

Summary

1

The Principles

PRIN 3.1.6 R

(Who?)

A firm is not subject to the Principles to the extent that it would be contrary to MiFID (and the other Single Market Directives).

2

PRIN 4.1.2 G

(Where?)

The territorial scope of some Principles has been extended and others narrowed according to the type of firm.

3

Systems and controls

SYSC 1 Annex 1.2.15R to 1.2.18R2

2

A UK MiFID investment firm is a common platform firm. It is subject to the common platform requirements in SYSC 4 to SYSC 10 and is not subject to the requirements in SYSC 2 and SYSC 3. The common platform requirements generally apply in relation to activities conducted from an establishment in the United Kingdom or another EEA State. However, this is subject to some modification, for example in relation to requirements on record keeping and financial crime. Most of the common platform requirements also apply in a prudential context to the activities of a UK MiFID investment firm from an establishment outside the EEA.

An EEA MiFID investment firm is not a common platform firm and is therefore not subject to the common platform requirements. However, it is subject to the common platform record keeping requirements. Some provisions in 2SYSC 92 will apply to the UK establishment of an EEA MiFID investment firm but only in respect of matters that are not reserved to the Home State regulator. This is particularly relevant to the provisions on systems and controls concerning financial crime and money laundering in SYSC 6.3. 2

2

4

Approved persons

SUP 10A.1, SUP 10C.1, COCON 1.1,4 APER 1.1A.4G and APER 2.1A.2R4

6

The territorial scope of some of the controlled functions under the approved persons regime and of the application of the Statements of Principle is modified as a result of MiFID.

5

The threshold conditions

6COND 1.1A.7 G6

(Where?)

The guidance indicates that the threshold conditions apply in relation to all the regulated activities of a firm wherever they are carried on except, for example, in relation to incoming EEA firms in certain cases. MiFID has not affected this.

Q71. What is the position in relation to record keeping in branches?

The effect of article 13(9) of MiFID is also to shift the default position (of regulation by the Home State) to regulation by the Host State for the record-keeping requirements imposed on a branch (see SYSC 1 Annex 1.2.17R).2

Q72. Will a branch need to report to the competent authority of the Member State where it is located?

For some purposes, yes. Article 61 of MiFID gives a Host Member State the power to require reports for statistical purposes and to require branches to provide information necessary for monitoring compliance with the standards of the Host Member State (see SUP 16.7 (Financial reports)). These standards are the ones referred to in Article 32(7) as set out in Q69.

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